Marin Katusa's  Instablog

The Gulf of Mexico disaster has changed U.S. priorities, costs, and energy supply sources for years to come. But the fact that the U.S. needs energy isn’t changing anytime soon, and as mass sources of green energy are still a while away, the most likely alternative might be the most surprising one.

With US$15 billion invested annually in offshore drilling in the United States, the disaster in the Gulf of Mexico means that this money is getting ready to migrate elsewhere. And it is the Athabasca oil sands of Alberta, Canada, that are number one on the list.

Given the amount of bad press the oil sands get, this could come as a shocker. But technological advances and improvements in recovery methods, as well as reduction of water usage and greenhouse gas emissions, have made oil sands a viable and popular option for the future of U.S. energy.

The numbers, too, are looking in their favor. Out of the 1.34 trillion barrels that is the world’s total proved oil reserves (2009), only about 20% (270 billion barrels) of this number is actually available to free-flowing capital investment – the vast majority is in the tight grip of various national oil companies.

And a good chunk of these “free-market” barrels, about 178 billion, is sitting underneath the feet of Canadians, or as some call them, the Crazy Canucks. For a country that runs on oil, the United States couldn’t have been presented with a better lifesaver. Compared to alternatives such as Chavez’s Venezuela or the oil fields of the Middle East, reliable oil from politically stable and friendly Canada is by far the easier pill to swallow.

As it is, roughly one in every six barrels of oil consumed by a U.S. citizen today comes from the Canadian oil sands. The fact that infrastructure is already in place for oil sands development and oil already flows through pipelines between the two countries only sweetens the deal.

So, we wouldn’t be taking a huge step in assuming that any future capital spending that will be diverted away from the Gulf of Mexico will find it hard to bypass Canada. In addition, as global oil supply is affected by the drilling restrictions, in the long term we’ll be seeing higher oil prices. While this news might not make the drivers amongst us happy, it couldn’t get better for Alberta and the energy companies operating in the oil sands. With oil prices hovering over US$70 a barrel, the stream of investment dollars into the oil sands is guaranteed.

Obama’s first-ever Oval Office address has confirmed our expectations of no more growth in the American offshore drilling industry anytime soon. But the Gulf accounted for a large chunk of U.S. oil production (25-30%) and consumption (9% – the entire consumption of France), and that shortfall must be met.

While renewable energy is where the future of U.S. energy lies, according to Obama, it is still some time before green energy producers will be able to meet the full demands of the nation. In the meantime, authorities have also realized the importance of Canada for U.S. energy and are enticing companies with new pipelines. Plans on expanding the Keystone Pipeline, linking up Texas and Oklahoma to 500,000 Canadian barrels a day, have already been drawn up and put into motion.

The turmoil in the U.S. energy market has created a number of opportunities, both in the short and long term. For now, investment into the Canadian oil sands is about to increase dramatically, and things are moving rapidly. We’ve uncovered the lowest-cost producer with significant upside production, and they’re the one on the list as a takeout target by Big Oil.

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[Discover the oil sands company Marin thinks so highly of… and get ready to profit when shares shoot up. But oil sands are not the only energy investment to benefit from the Gulf Coast disaster – read more here or sign up right now for a $39/yr. subscription with 3-month money-back guarantee.]

Disclosure: no positions

By Marin Katusa, Chief Market Strategist, Casey Research Energy Division

After a troubled past, resource-rich Albania is trying to modernize itself into a good place to do business… and with astonishing success.

Over the years, we’ve visited Albania more times than we’d care to admit. Although it’s not a place we’d recommend for a family vacation, your investment dollars will find a happy home there. Unlike the rocky tale of Albania itself, the latest oil development stories are bound to have a much happier ending.

Albania, Diamond in the Rough?

Albania, about the size of Massachusetts, is surrounded by Montenegro, Kosovo, Macedonia, Greece, and the Adriatic Sea. It beats out only Moldova in gross domestic product (GDP) by population: at US$6,300 per person, it’s dwarfed by the likes of America (US$45,800 per person) and even financially buggered Greece (US$30,000).

A lack of consistent energy and transportation infrastructure is partly responsible for Albania’s sorry numbers. Areas outside capital Tirana and Durrës, a large port, still experience blackouts with fair regularity. Railways are limited, and while major cities are connected by highways, smaller roads can be relatively difficult to access and then to negotiate when you find them. The reasons the country is now having to play catch-up lie in 20th-century history.

Albania was one of the first casualties of World War II, when it was invaded by Italy on April 7, 1939, five months before Germany’s more famous invasion of Poland. It fell within the week. The country bounced between Italian, Greek, Bulgarian, and then German hands for the next five years before being liberated by communist Albanian partisans in November 1944.

In the years following World War II, Enver Hoxha, the first secretary of the Communist Party of Labor of Albania, moved into power. Hoxha did improve health care, literacy, and other aspects of everyday life, but the country’s economy in general stagnated. His isolationist policies and cult of personality discouraged international trade and, as a consequence, the development of infrastructure.

The book Albania: From Anarchy to Balkan Identity describes the country under Hoxha as "an island of increasing poverty and demoralisation, with a rapidly disintegrating infrastructure, crumbling buildings, malnourished and poorly clad workers and peasants using primitive agricultural equipment."

Hoxha finally died in 1985. Five years later, anti-communist sentiment swelled, and riots broke out within Albania as a result of overwhelming anti-communist sentiments. The personality cult of Hoxha was attacked in particular:

Anti-communist protestors pull down a statue of Hoxha in downtown Tirana in February 1991. (Photo courtesy of Berlin-based ESI, the nonprofit European Stability Institute.)

The end of Hoxha's rule, of communism in Albania, and of the Cold War in general brought economic improvements in the early 1990s as Albania struggled to transition to a multi-party, open-market system. Unemployment and inflation dropped while the country maintained a consistent 8% growth in its gross domestic product (GDP).

Unfortunately, inside that engine of newfound wealth were pyramid schemes set up by the unscrupulous, often with the backing of corrupt government officials. A substantial proportion of Albanians, unschooled in the workings of financial markets, were lured in by promises of high payouts. By the time these unsustainable investment schemes collapsed in early 1997, an estimated US$1.5 billion was invested among a population of less than 3.5 million. Life savings were wiped out for many Albanians, which led again to riots and an economic downturn. A new government, installed in the summer of 1997, struggled to restore public order and to revive trade and other healthy economic policies.

Looking for the Right Track

Albania today is still not without its problems. Roads total only 7,000 kilometers and railways 900 km. The country imports much of its electricity and most manufactured goods. Unemployment is high, and more than half the population is still involved in agriculture. Relations with Serbia, Russia, and China have been strained since Kosovo, a largely ethnic Albanian region, broke with Serbia in 2008. Internally, its political parties are also less than warm and fuzzy: the main opposition boycotted (and is still boycotting) Parliament in June 2009, accusing the ruling party of electoral fraud.

On the business front, Albania has still not fully constructed its business regulatory framework, which could lead to long delays in obtaining permits and other properly ordered ducks. In fact, the World Bank’s “Doing Business” report stuck Albania at #173 out of 183 countries in dealing with construction permits, based on data from June 2008 to May 2009. (Overall, its “Ease of Doing Business” ranking is #82.)

Finally, Albania lacks pipelines, particularly in the north – a hurdle for oil and gas exploration and development:


Europe’s network of oil and gas pipelines. Modified from this site, which quotes “various sources.”

Sooo… Why Albania?

There actually are some attractive aspects in the cheerful picture we’ve painted so far. For one thing, we’ve yet to talk about the amount of Albania’s hydrocarbon potential. Combined with gradual improvements in its political, financial, and social structures, Albania offers several investment advantages for risk-tolerant investors looking to get in near the ground floor. We’d be on the heels of several big names in the resource sector. Here are the advantages we see in Albania. This list is the product of many trips to the country as well as research-based analysis:

1.Pro-America relationship. Politically, Albania is a close ally of the United States, and Albanians in general tend to be very fond of America. Many still regard Bill Clinton as a hero for saving Kosovars during the war in Kosovo. Having a pro-American and thus pro-West attitude in both government and general public means there is less chance of sudden nationalization, short of a civil war or coup d’état.

2.Stabilizing and pro-business government. Albania’s president, Bamir Topi, has been relatively quiet in his affairs and has a reputation for a nonpartisan approach. The most controversy he causes is his pro-Kosovo stance, which generally infuriates Serbia and Russia. A fair portion of his attention goes toward attracting more foreign capital into his impoverished nation. Much of his other time is spent trying to resolve the legislative boycott we noted above. Some improvements so far under his administration:

– Gradual simplification of the administrative and business regulations

– Corporate taxes lowered to 10%

– Exemption of most businesses from the Value-Added Tax (VAT)

– Easier access to credit

– Regulation that provides greater protection for investors

3.Improvements in infrastructure. With improvements in Albania’s economy have come upgrades in transportation and trade. There’s a new highway that runs along the coast, and another connects Durrës, the country’s main port, to the central Balkans via Kukës. Infrastructure is a primary focus of the current regime, as the government understands that attracting more foreign investment requires building a more modern network to move people and goods around.

4.Long record of oil production. Albania’s history with oil dates back some 2,000 years, when the Romans mined bitumen in the southwest (Apollonia, today the city of Fier) to caulk their ships. The first wells were drilled in the early 1900s, with Rockefeller's Standard Oil and the predecessor of BP, Anglo Persian Oil Company, leading the expansion of Albania’s oil industry. In 1932, the largest European onshore oil field was discovered at Patos-Marinza, now operated by Bankers Petroleum. Oil production only began to dwindle under the poor leadership of Hoxha in the communist era.

5.Good fiscal structure for oil. Albania has improved its fiscal structure in the last decade. It’s dropped its production sharing agreements, for example, letting more profits stay with businesses. For those who like the details, here are the latest fiscal terms: an 11% to 15% overriding tax-deductible royalty, with a 50% petroleum tax on the income. The total government take at US$80 oil ranges from the just above 50% for large deposits to closer to 60% for small deposits. That’s slightly lower than the average government take in other developing countries.

6.Potential rewards. In 2008, Switzerland-based Manas Petroleum (MNAP) announced it found an estimated 3 billion barrels of oil and 3 trillion cubic feet of natural gas at depth. That’s an awful lot of oil. Another success story is Bankers Petroleum (T.BNK), which in the past two years has taken off from a low of C$0.46 to its high of C$9.18 in early April 2010 [graph needs updating]:

Clearly we see the potential to make plenty of money in Albania, despite the risks and potential difficulties. Fortunately for us number-crunching analysts, not many companies are currently operating there. The small field is narrowed even further when we focus just on the North American companies.

If you want to know which energy stocks are poised to profit handsomely from the opportunities in Albania, learn from the best in the field – Marin Katusa and his team. Marin, a former math professor and proficient early-seed investor with a vast network of industry connections, is a master in picking future stock winners in the junior exploration as well the large- to mid-cap energy sectors.
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His boots-on-the-ground approach, combined with an early-warning algorithmic system, allows him to find just the right entry level to minimize risk and maximize returns. Learn why investing in the right oil companies, and other resources like nuclear and renewables, is essential for every prudent investor right now – because we are running out of oil… fast. Click here for more details.

By Marin Katusa, Chief Investment Strategist, Casey Research Energy Division

What do search engines and wind energy have in common? That’s the question a lot of investors were asking earlier this month, when Google made an almost US$40 million investment into NextEra Energy Resources, a North Dakota wind energy firm. The simple answer: more than you think.
 

It’s not surprising that the Internet search-engine superstar needs energy. Companies like Google own massive computer frameworks, known as server farms, to store all that digital data floating around in cyberspace. While Google is quite hush-hush about how many computers it owns, estimates put it at about 1,000,000 servers (almost 2% of the world total), and an enormous amount of power is needed to keep them running constantly. And as cyber-information grows – almost 24 hours of video footage is uploaded onto YouTube every minute – more and more computers are required to store and distribute it.
 

But where does their power come from? Most server farms are located near coal-fired generating plants. Good for efficiency, but that adds up to a pretty big carbon footprint. Naturally, this has environmental groups fuming and lobbying the corporations for clean energy alternatives. Given Google’s avowed sensitivity on this issue, investing in wind turbines in North Dakota makes good public relations sense.
 

However, it is usually the company’s philanthropic arm, Google.org, that handles such good-citizen initiatives. Thus the unprecedented move to make a first-time direct investment into NextEra Energy suggests that Google is expecting something further.
 

It seems logical to assume that the company’s motivation also involves saving money by slashing its dependence on coal-fired generators. After all, when your electric bills approach that of a small country, it’s hard not to jump on a company that could potentially produce enough power to light up 55,000 homes.
 

But if this is, in part, an exercise in cost-cutting, Google made a big mistake: it chose the wrong renewable energy.
 

Wind Farms vs. Geothermal Power
 

The main problem with wind farms: they don’t work when it’s not windy.
 

But that’s not all. Wind energy is plagued by high capital costs, a weak power transmission system, and low output, making its success heavily dependent on government subsidies. Load factors for wind energy – that is, the difference between how much power a generator can produce and how much it actually produces, which determines how much money a utility will make – are also quite low. The large physical footprint – the amount of land required to build wind farms – is another downside, as is the threat they pose to birds and the noise pollution they generate.
 

Add this all up and you’ve got the biggest loser when it comes to going green. In reality, the best renewable energy bet Google could make, especially in the United States, is on geothermal. Leaving everything else aside, geothermal beats wind energy on the most important factor: it is not dependent on weather. That means there is no need for backup power generation facilities, something wind farms must have for the days when the turbines won’t turn. Nor are government subsidies absolutely necessary for geothermal energy; they’re more of an added bonus. And geothermal power plants require the least amount of land: they can hum away contentedly even in the middle of farmland or a park.
 

Geothermal also wins on the numbers, with the highest load factor of all renewable energies and the biggest profit margin. Take a look at the cost breakdown of renewable generating technologies in the U.S. – it’s clear that geothermal is miles ahead:
 

Generating Technology*	Load Factors	Revenues per plant (US$0.10/kWh electricity)	Costs of Operations** (US$)	Profit From Operations (US$)	Capital Costs 2009 (US$ per KWH)
Geothermal	90%	$39,420,000.00	$8,416,500	$31,003,500	$1,749.00
Hydroelectricity	45%	$19,710,000.00	$696,500	$19,013,500	$2,900.00
Wind - Onshore	25%	$10,950,000.00	$1,549,000	$9,401,000	$1,966.00
Wind - Offshore	40%	$17,520,000.00	$4,346,000	$13,174,000	$3,937.00
Biomass	90%	$39,420,000.00	$30,336,620	$9,083,380	$3,849.00
Photovoltaic	25%	$10,950,000.00	$597,000	$10,353,000	$6,171.00
Solar - Thermal	15%	$6,570,000.00	$2,902,500	$3,667,500	$5,132.00

* Numbers are on a comparable per-plant basis   ** Costs are exclusive of subsidies.

Once Bitten, Twice Shy
 

Perhaps the reason Google decided to go with wind energy this time is because it gave geothermal a chance in the past. Two years ago, through Google.org, the company became the biggest investor in enhanced geothermal research, beating even the United States government. Unfortunately, that time around, Google picked the wrong company.
 

Google invested US$6.25 million into AltaRock Energy in August 2008, to help the company make a success of its promising Geysers project in northern California. AltaRock was using the latest technology – Enhanced Geothermal Systems (EGS) – in an attempt to harness some of the energy locked far beneath the earth’s surface. As Google discovered, though, making a sound investment is not as simple as picking a company just because it has a great project location and the finest in tech. A host of pitfalls faces any geothermal developer – including inexperienced crews, insufficient financial backing, and the lack of a good power purchasing agreement.
 

But most formidable of all are the challenges of very deep drilling. While EGS represents a breakthrough, it’s still new, and it’s tricky to use. To properly exploit its potential, companies need to learn how to drill that deep, and to do so despite the hot corrosive fluids and unfriendly intervening layers of rock that can ruin a well in short order. And as if that weren’t enough, users have to work extra cautiously. Geothermal activity is generally found around seismic fault lines, and fracturing deep rocks using hydraulic pressure has linked EGS to earthquakes.
 

 As AltaRock Energy (and its investors) found out, it’s going to take more than just fat corporate and government checks and tweaks to conventional techniques for EGS projects to work. The Geysers project came to an abrupt halt just over a year after drilling began. Barely a third of the well’s planned 12,000 ft depth had been reached before drillers encountered a layer of fibrous rock that caused the holes to collapse.
 

Getting on the (Right) Green Bandwagon
 

Renewable energy is essentially still in its infancy, with plenty of barriers to surmount. At the same time, there’s no mistaking politicians’ growing desire to climb onto the bandwagon. Which means more and more companies are jumping at the chance to join in. But this is still relatively unexplored territory, and the market has some hard lessons yet to teach. Not every company... or idea... is cut out for this.
 

It would be wrong to say wind energy doesn’t have a future, because it does – a very distant and windy one. One that won’t be materializing anytime soon, at least not until the capital costs of wind development drop and transmission techniques improve.
 

Geothermal isn’t easy. The Geysers failure demonstrates that. But it’s proven, it’s cost effective, and it runs 24/7... so for now, it’s our favorite renewable energy.
 

Our research is focused on finding the best geothermal companies out there and, because Google is our favourite search engine, we’ll be happy to share that research with CEO Eric Schmidt and his band of merry men. So come on Google, feel lucky and click here – we’ll give you a free three-month trial with our Energy newsletter, including our #1 geothermal recommendation.

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